COHEN--Goldman's Cohen Says Slump Overdone
By Brinley Bruton
NEW YORK (Reuters) - The recent stock market slump is overdone and makes stocks a good buy, especially because a strong U.S. economy will keep boosting corporate profit growth, one of Wall Street's most influential stock analysts, Goldman Sachs' Abby Joseph Cohen, said on Friday.
The Standard & Poor's 500 stock index -- which closed on Thursday at 1325.21 --is undervalued by 15 percent, said Cohen, who has been one of Wall Street's most bullish market-watchers. She reiterated her year-end S&P 500 Index target of 1575.
``Importantly, our economic outlook still calls for real GDP growth averaging 3 percent to 4 percent in coming quarters, close to the trend rate suggested by productivity gains and labor force growth,'' Cohen said in a research note sent to clients and the press.
Falling stock prices have made valuations more attractive, she said.
The technology-packed Nasdaq Composite (^IXIC - news) soared 242.09 points, or 7.87 percent, to end at 3,316.77. It was the Nasdaq's second-biggest percentage gain after the 7.94 percent jump on May 30, 2000.
The Dow Jones industrial average (^DJI - news), a gauge of 30 blue-chip companies, rose 157.60 points, or 1.57 percent, to 10,192.18, as it reversed part of Thursday's 379-point slump. The broader Standard & Poor's 500 Index (^SPX - news) advanced 44.39 points, or 3.34 percent, to 1,374.17, based on the latest data.
Stocks on Thursday hit year-lows on escalating violence in the Middle East, which sent oil prices surging. The market was also spooked by a warning of yet another brand-name company, U.S. home improvement retail giant Home Depot Inc. (NYSE:HD - news) that profit growth would slow.
Recent corporate earnings warnings, which have sent shivers through the markets, are overshadowing solid profit growth at many companies, Cohen said. The warnings in part are spurred by new rules that will require companies to disclose financial information to the public, instead of to a select group of analysts and money managers, she added.
A series of companies issued earnings warnings during the last week, including chemicals concern Union Carbide Corp (NYSE:UK - news) and technology giant Motorola Inc. (NYSE:MOT - news).
While the pre-announcement period -- the time when companies tend to issue negative announcements in preparation for the upcoming earnings period -- is largely over, it is still too early to properly analyze third-quarter results, Cohen said. However, of the companies that have announced, more than 70 percent have reported above expectations, she said.
Along with the falling stock prices have come improved valuations, said Cohen. Goldman's valuation for the S&P 500 has assumed there will be a moderation in profit growth to about 8 percent from 20 percent, and a rise in core inflation, Cohen said.
On Friday the U.S. government announced that the Producer Price Index, a key gauge of inflation at the wholesale level, rose 0.9 percent in September, vs. expectations for a 0.5 percent rise.
Goldman already predicted that there would be a deceleration in the pace of economic and profit expansion before the end of the year, Cohen said.
``It would appear that investors' feverish wish of last winter, for a less robust economy, has been fulfilled,'' she said.
As for escalating violence in the Middle East, which helped fuel Thursday's sell-off partly on fears that it would push energy prices up, Cohen said Goldman had not changed its baseline scenario in which energy prices would begin to decline next spring. |
